What does a bond's coupon rate represent?

A bond's coupon rate represents the nominal interest payment made to bondholders, expressed as a percentage of the bond's face value or par value. This rate indicates the amount of interest that the bond will pay annually to investors, providing a fixed income stream during the life of the bond until it matures.

The coupon rate is important for investors because it helps assess the regular income they can expect from holding the bond. Thus, if a bond has a face value of $1,000 and a coupon rate of 5%, the bondholder would receive $50 in interest payments each year. This rate is established at the time of issuance and remains constant throughout the life of the bond.

In contrast, the other options refer to different concepts within the bond market. The total investment cost relates to how much an investor pays to acquire the bond, which may differ from the face value, especially if the bond is trading at a premium or discount. The yield based on current market prices reflects the current return on investment, which can fluctuate due to changes in market interest rates or the bond's risk profile. The bond’s priority in the capital structure pertains to the order in which creditors are paid in the event of liquidation, which does not relate to the payment of